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Grifols's (OTCQB:GIFLF) purchase of Novartis's (NYSE:NVS) blood transfusion diagnostics business for $1.7bn gets it a greater footprint in the US and ought to push its diagnostics unit's revenues past the $1bn mark.

The deal is perhaps more interesting for what it means for Novartis, currently in the throes of a strategic review. The Swiss giant insists that the divestment to Grifols does not point to further specialisation and dismisses any suggestion that it might hive off some of its other units as "wild speculation." Nevertheless there is certainly an argument for narrowing its focus.

Blood money

Novartis is a pretty diverse group, with businesses encompassing speciality and generic pharmaceuticals, eye care, vaccines, over-the-counter drugs and animal health. The first three businesses are global in scale, with annual revenue in excess of $10bn, and Novartis's chief executive, Joe Jimenez, has said that it aims to grow the three smaller ones to the same size and reach.

Novartis's transfusion testing unit is a bit of an outlier. It came into Novartis's possession, along with the vaccines business, when the company bought Chiron in 2006, and turnover for both is broken out in Novartis's annual and interim reports. The vaccines and diagnostics unit had sales of $1.9bn in FY 2012, $565m of which came from the transfusion technologies, which screen donated blood for infections including HIV, hepatitis B and C and West Nile virus.

This segment, however, is not growing. A Novartis spokesperson told EP Vantage that revenues from the unit had "probably" not changed significantly from the previous year. It will now be up to Grifols with its specialist focus to increase sales.

Within the healthcare sector there has been an unmistakeable trend towards specialisation over the past 18 months, with AbbVie (NYSE:ABBV), Pfizer (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ) all splitting off non-core units. It is not known how far Novartis's strategic review has progressed - certainly the Grifols deal is the first step the company has taken.

Recovery?

It is possible that no further divestments will be made, but Novartis's animal health and OTC operations, listed together on its balance sheet under the title consumer health, are perhaps too tangential to its mission.

Grifols, for its part, is embarking on its biggest buy since the $4bn purchase of Talecris Biotherapeutics (NASDAQ:TLCR) in 2010. It already partners with the Novartis diagnostics business, so there should be few integration problems. The purchase will allow it to scale its own testing operations, particularly as it opens the door to the US a little wider. It said that after the integration of Novartis's technology, its diagnostics unit would make up 20% of its revenues, up from 4% now.

It is to be hoped that the all-cash, loan-funded deal points to the beginnings of a recovery in the medtech M&A arena. By the time the deal closes next year it ought to be clear whether the scene has really picked up.

Source: Novartis: Transfusion Tests Sale Does Not Point To Further Divestments